ON THE CASE

The Situation: If there was ever a time to take advantage of dropping commercial real estate prices in Alberta, about now would seem to be it. And Jonathan Merck*, master franchisee of the Hill Country Texas Grill chain of south Texas-style barbeque resta

A bud ding restaurant chain owner tries to setup a central food-preparation operation.

The commissary would act as a central hub that takes care of the smoking, stewing and cooking of the meat, as well as a bakery. The prepared meats and breads would then be shipped out to the franchise locations on a just-in-time basis. Two potential franchisees were ready to commit their capital in November 2015 and they were prepared to open within a month. “The economy is going through a bumpy patch, but we’ll come out of it fine,” Merck said.

“Do I open a commissary before the optimal number of five locations are in place? Or do I subsidize food costs to ensure the first two locations open on time?”

At first glance, a Hill Country Texas Grill outlet could be mistaken for a run-down gas station — locations are compact, no more than 900 square feet in size — but that is the point. It’s designed to look like an old barbeque joint has just been transplanted from the dusty hill country of south Texas, which, given the influence from the region’s proximity to Mexico, is known for a cooking style that emphasizes thick sauces and direct grilling.

The Hill Country concept is unique. “The décor is deliberately no frills,” Merck said. “We’ll have whitewashed walls, plain vinyl floors, corrugated steel siding and bare fluorescent bulbs.” Patrons would line up to place their meat order, see it sliced from a slab and sold by the pound, then sit down to eat in a cafeteria-style layout. Even the service would be minimal, with rows of bottled drinks cooling down in waist-high troughs packed with ice.

“Great food at a low cost to the customer,” Merck said. And at foodstall operating costs to boot, because a majority of the meat was to be prepared offsite.

A commissary would break even when serving five locations; it would generate a healthy profit at 10 locations. But opening one would eat up $450,000 in cash, which was money Merck did not have. The money would be used to lease a space, buy the equipment and leave enough working capital to run it for six months.

He was already close to maxing out his line of credit, having spent money on the Canadian rights for the franchise and the preparatory legal work required to bring the concept north. “I underestimated the costs,” he said. “I should have started with twice the amount of money in the first place.”

Without a commissary, each location would have to swallow an extra $65,000 a year in food preparation costs, including the cost of additional labour. “This represented, potentially, two-thirds of an average location’s pre-tax profits,” Merck said. He wasn’t sure if the two potential franchisees would be open to sharing the cost of onsite food prep, at least for the first year or two. “I haven’t broached the topic,” he said. “I want to be sure I think through my options.”

He considered raising additional capital from friends and family. He figured he would only be able to raise another $250,000 if he sold a 20% stake in the business. “I’ve casually asked a few people about their risk appetite, but it seems they’re reluctant to bet on a new concept when the economy is down,” he said. “This goes to show that while many believe in the concept of ‘buying low and selling high,’ this advice often goes unheeded because it goes against our basic human instincts.”

Merck wanted to finalize his plans within two weeks while interest from the two investors was still high. Wait too long, he feared, and they might lose interest and seek other opportunities. “My restaurant model should do well regardless of economic conditions,” he said. “The food is delicious and it hits the right price point.” This case study was prepared by Financial Post Magazine and the Pierre L. Morrissette Institute for Entrepreneurship at the Richard Ivey School of Business (Western University). The case method is a key learning tool in the cross-enterprise leadership approach used at Ivey. The views represented here are solely those of the case authors. Some details may have been changed to protect privacy.